Date of Original Version

11-2005

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

Dale Carnegie once said that the sound of one’s name is the sweetest for any person. Much internet personalization acts on this mantra by trying to create an online environment where customers are greeted by name and are recommended products based on their preferences. However, no clear empirical evidence exists as to whether consumers desire personalization or whether privacy concerns override the benefits of personalization. Using theories from psychology and consumer behavior, we address this dilemma by developing hypotheses related to how consumers respond to a firm’s collection and use of information for personalization. To test these hypotheses, we propose a multi-stage ordered probit model using a hierarchical Bayesian framework to account for consumer heterogeneity via individual level parameter estimates. The data for this research comes from a website which captured information on actual consumer responses to ten million email advertisements sent to 600,000 customers over a nine month period. We examine the impact of different types of personalization as well as measure consumer response at multiple levels. We also control for consumer and promotion specific characteristics in our model.

Our results not only indicate the economic benefits of personalization but also highlight consumers’ privacy concerns. The main results are as follows: first, emails personalized only on the basis of consumers’ product preferences get a more favorable response from consumers than those with no personalization. Second, we show that more than 85% consumers react negatively to personalized greetings in an email, suggesting that consumers are likely to perceive a violation in privacy if they see their name in an email advertisement. Third, we show that consumer response is mixed if both personalized greetings and product-based personalization are used in an email. While most consumers react negatively if both personalized greetings and product-based personalization are used in an email, consumers who buy more often from a firm prefer emails where personalized greetings are accompanied by reliable product recommendations. This suggests that familiarity with a website mitigates customers’ privacy concerns. Overall, we show that customers differ significantly in their preference for different types of personalization and that ‘personalized’ personalization (where different customers receive different levels of personalization) is more effective than all-inclusive personalization (in which each advertisement is personalized at multiple levels).

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